A limited constitutional government calls for a rules-based, freemarket monetary system, not the topsy-turvy fiat dollar that now exists under central banking. This issue of the Cato Journal examines the case for alternatives to central banking and the reforms needed to move toward free-market money.

The more widespread use of body cameras will make it easier for the American public to better understand how police officers do their jobs and under what circumstances they feel that it is necessary to resort to deadly force.

Americans are finally enjoying an improving economy after years of recession and slow growth. The unemployment rate is dropping, the economy is expanding, and public confidence is rising. Surely our economic crisis is behind us. Or is it? In Going for Broke: Deficits, Debt, and the Entitlement Crisis, Cato scholar Michael D. Tanner examines the growing national debt and its dire implications for our future and explains why a looming financial meltdown may be far worse than anyone expects.

The Cato Institute has released its 2014 Annual Report, which documents a dynamic year of growth and productivity. “Libertarianism is not just a framework for utopia,” Cato’s David Boaz writes in his book, The Libertarian Mind. “It is the indispensable framework for the future.” And as the new report demonstrates, the Cato Institute, thanks largely to the generosity of our Sponsors, is leading the charge to apply this framework across the policy spectrum.

Archives: 09/2012

Chicago’s teachers have just walked off the job, and most of the media coverage is quick to point out that this is the city’s first strike in a generation. But is anyone really that surprised by a public school union striking just as kids are supposed to be heading back to class in September? Wouldn’t you be a lot more shocked if you logged on to Amazon.com and were greeted by the message that its site was down due to an employee walkout? Or if you took the kids to the movies to see the latest cartoon extravaganza and found picketing ticket-takers? What is it about public schools—and other government enterprises, for that matter—that have made their unions so much more dominant than those in the private sector? [Two thirds of the public school workforce is unionized compared to about 7 percent in the private sector].

Competitors. Or, rather, the lack of them. Private sector workers can only demand so much from their companies before the demands become self-defeating. Get a pension package that’s too cushy, a salary that’s too far above the market rate, and the employer will have to pass those costs on to customers. And if those higher prices aren’t accompanied by correspondingly better quality, customers will simply go elsewhere—hurting the employees who asked for more than the market would bear.

And there’s the problem with public schooling: there’s no “elsewhere.” If you don’t like the way your local school district is run, there isn’t a competing school district vying to provide your kids with a better education at a lower cost. You’ve got no place else to go, and unions know this. So they can ask for more employees to be hired, better pensions or health benefits, and they can demand that their compensation not depend on their performance. And there’s very little that parents and taxpayers can do about it.

That’s what’s happened in Chicago, where the average teacher’s salary is about $75,000 (almost 50% above the citywide private sector average), public sector retirement benefits are so generous that Illinois owes $203 billion for this purpose that it simply doesn’t have, and the teachers’ union has decided that it will not go along with the district’s plan to make salaries depend partly on classroom performance.

In the absence of real private sector competition and parental choice, public school unions have been able to drive up the system’s costs without needing to show improvement in performance. Sooner or later, Illinois will adopt a system, like education tax credits, that provides real choice and competition, because the current system will ultimately bankrupt the state.

The failure of cybersecurity legislation in Congress was regarded as “a blow to the White House“—heaven knows why—so the plan appears to be to go ahead and regulate without congressional approval. Under the draft EO, a Department of Homeland Security-led cybersecurity council will develop a report to determine which agencies should regulate which parts of the nation’s “critical infrastructure.”

Keep an eye on that phrase, “critical infrastructure,” because it’s a notorious weasel-word. I argued in 2009 congressional testimony that something might be critical if “compromise of the resource would immediately and proximately endanger life and health.” But the CSIS report—the prominence of which is matched only by its lack of rigor—said, “[C]ritical means that, if the function or service is disrupted, there is immediate and serious damage to key national functions such as U.S. military capabilities or economic performance.”

When hungry bureaucrats are doing the interpreting, economic performance means “anything.” The subjectivity of “immediate” and “serious” don’t change that.

So the “cybersecurity council” will sit down at a table and carve up the economy to determine which agency regulates what industry in the name of “cybersecurity.” They’ll wheel and deal amongst themselves over everything that might fail with imagined “critical” consequences—nevermind that they have no idea what to do about it.

Then it’s fake it ‘til you make it. Though they haven’t got authority from Congress, these agencies will act as though they do. Businesses that don’t participate in government standard-setting will risk having the standards used against them in liability actions. Companies that don’t participate in “voluntary” information-sharing will see their ability to win government contracts erode.

Again, I don’t see why the Obama administration thinks it matters so much to seize power under the “cyber” banner. Perhaps they’re taken in by the gross threat-exaggeration that pervades in this area. But Steven Bucci of the Heritage Foundation has it right:

The President should resist the temptation to ladle on a new regulatory bureaucracy (or bureaucracies) simply to satisfy the need to “do something.” If it is not done right, it will do damage. Let the debate continue until it is done right, Mr. President. It’s called the democratic process, and it invariably provides the best answers, even if it takes awhile.

NPR notes on Sunday that Rep. Paul Ryan’s voting record in Congress calls into question his image as a deficit hawk. But they emphasize Alice Rivlin’s explanation:

I think you have to distinguish deficit hawk from small-government conservative. I think of him as a man committed to a smaller government that has less of a role in people’s lives. He really believes that: that the government does too much. And he thinks taxes should be less.

Rivlin and Douglas Holtz-Eakin are correct to distinguish between mere deficit hawks and philosophical advocates of smaller government. But it’s not clear that Ryan’s voting record supports that theory either:

FOR the No Child Left Behind Act (2001)
FOR the Iraq war (2002)
FOR the Medicare prescription drug entitlement (2003)
FOR Head Start reauthorization (2007)
FOR Economic Stimulus Act (January 2008)
FOR extending unemployment benefits (2008)
FOR TARP (2008)
FOR GM/Chrysler bailout (2008)
FOR $192 billion anti-recession spending bill (2009)

To be sure, Ryan speaks eloquently about smaller government. And he certainly supports smaller government – at least in terms of federal spending on non-military programs – than President Obama and Vice President Biden, who never met a government spending program they didn’t love. And of course we know that members of Congress tend to support the positions of their party. But he still needs to work to get his actions in line with his rhetoric.

During the dark ages, nations like China were relatively advanced while Europeans were living in squalid huts.

But that began to change several hundred years ago. Europe experienced the enlightenment and industrial revolution while the empires of Asia languished.

What accounts for this dramatic shift?

I’m not going to pretend there’s a single explanation, but part of the answer is that Europe benefited from decentralization and jurisdictional competition. More specifically, governments were forced to adopt better policies because labor and capital had significant ability to cross borders in search of less oppression.

But you don’t have to believe me. This topic was discussed by Professor Roland Vaubel at last week’s Mont Pelerin Society meeting. Here are some excerpts from one of Professor Vaubel’s papers on the topic.

…competition among the public institutions of different countries can benefit from an international competitive order which preserves peace and prevents governments from colluding with each other at the expense of third parties, notably their citizens.

This post will have lots of additional excerpts, but if you’re not as excited by the issue as I am, just take a moment to review the table below the jump from Vaubel’s paper (click it for a larger image). You will see that the intellectual history of this issue is enormous, and the common theme is that big, centralized states hinder development.

Remember that this table merely looks at the classical thinkers on the issue. The paper also includes modern thinkers, some of who are quoted below. And I also have a postscript that shows how many Nobel Prize-winning economists see jurisdictional competition as a tool for restraining excessive government.

But let’s see what insights we can find from the great thinkers of history, starting with this passage from Charles Montesquieu that Vaubel cites in his paper.

In Europe, the natural divisions form many medium-sized states in which the government of laws is not incompatible with the maintenance of the state; on the other hand, they are so favourable to this that without laws this state falls into decadence and becomes inferior to all the others. This is what has formed a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce… princes have had to govern themselves more wisely than they themselves would have thought, for it turned out that great acts of authority were so clumsy that experience itself has made known that only goodness of government brings prosperity.

In other words, the mobility of capital among jurisdictions limits government interference.

The father of economics, Adam Smith, made a very similar point. Here’s a passage from the Wealth of Nations that Vaubel includes in his paper.

The … proprietor of stock is properly a citizen of the world and is not necessarily attached to any particular country. He would be apt to abandon the country in which he is exposed to a vexatious inquisition in order to be assessed a burdensome tax and would remove his stock to some country where he could either carry on his business or enjoy his fortune at ease. A tax that tended to drive away stock from a particular country would so far tend to dry up every source of revenue both to the sovereign and society … The nations, accordingly, who have attempted to tax the revenue arising from stock, instead of any severe inquisition … have been obliged to content themselves with some very loose and, therefore, more or less arbitrary estimation. The abuses which sometimes creep into the local and provincial administration of a local or provincial revenue, however enormous so ever they may appear, are in reality, however, almost always very trifling in comparison with those which commonly take place in the administration and expenditure of the revenue of a great empire.

Jacques Turgot (Bastiat was not the only great French economist) looked at the new nation of the United States and saw the benefits of jurisdictional competition.

The asylum which (the American people) opens to the oppressed of all nations must console the earth. The ease with which it will now be possible to take advantage of this situation, and thus to escape from the consequences of a bad government, will oblige the European governments to be just and enlightened

And Immanuel Kant observed.

…civil liberty cannot now be easily assailed without inflicting such damage as will be felt in all trades and industries and especially in commerce; and this would entail a diminution of the powers of the state in external relations. This liberty, moreover, gradually advances further. But if the citizen is hindered in seeking his prosperity in any way suitable to himself that is consistent with the liberty of others, the activity of business is checked generally; and thereby the powers of the whole state are again weakened.

Kant expanded on this notion in another publication.

…peace is created and guaranteed by an equilibrium of forces and a most vigorous rivalry. Thus, nature wisely separates the nations.

…the distribution of power among several states is the best check on democracy. By multiplying centres of government and discussion it promotes the diffusion of political knowledge and the maintenance of healthy and independent opinion. It is the protectorate of minorities and the consecration of self-government. …It is bad to be oppressed by a minority but it is worse to be oppressed by a majority.

Max Weber wrote.

The competitive struggle (among the European nation states) created the largest opportunities for modern western capitalism. The separate states had to compete for mobile capital, which dictated to them the conditions under which it would assist them to power.

Weber’s comments are significant from a terminological perspective. As Vaubel noted in his paper, “This is the first time that we find the economic term “competition” rather than jealousy (Hume) or rivalry (Kant) or emulation (Gibbon) in this literature.”

From Eric Jones.

…how did Europeans escape crippling exploitation by their rulers? … The rulers of the relatively small European states learned that by supplying the services of order and adjudication they could attract and retain the most and best-paying constituents …European kings were never as absolute as they wished. The power dispersed among the great proprietors was a check on them, as was the rising power of the market.

Harold Berman of Harvard wrote.

In the Western legal tradition diverse jurisdictions and diverse legal systems coexist and compete within the same community. … The pluralism of Western law was a source of legal sophistication and of legal growth. It was also a source of freedom.

Brian Tierny noted that rivalry between church and state also helped advance liberty.

In the Middle Ages there was never just one hierarchy of government exercising absolute authority but always two – church and state to use the language of a later age – often contending with one another, each limiting the other’s power” (1995, p. 66). “Since, in the conflicts between church and state, each side always sought to limit the power of the other, the situation encouraged theories of resistance to tyranny and constitutional limitations on government.

Here are some additional quotes from more modern academics, all taken directly from Professor Vaubel’s paper.

“In the West, the absence of an empire removed the crucial bureaucratic block on the development of market forces; merchants persecuted in one place could always go with their capital elsewhere” (John A. Hall 1985, p. 102).

“The paradox is that competition between states, economic and political rivalry, and international tension are the best guarantees of continuing progress … The very tension which presents the greatest threat to our survival assures that, if we survive at all, some states, in order to compete better, will be obliged to encourage intellectual freedom and progress” (Daniel Chirot 1986, p. 296).

“Competition among the political leaders of the newly emerging nation states … was an important factor in overcoming the inherited distaste of the rural military aristocracy for the new merchant class. Had the merchants been dealing with a political monopoly, they might not have been able to purchase the required freedom of action at a price compatible with the development of trade” (Nathan Rosenberg, L.E. Birdzell 1986, pp. 136ff.).

“The political and social consequences of this decentralized, largely unsupervised growth of commerce … and markets were of the greatest significance. In the first place, there was no way in which such economic developments could be fully suppressed … There existed no uniform authority in Europe which could effectively halt this or that commercial development; no central government whose change in priorities could cause the rise and fall of a particular industry; no systematic and universal plundering of businessmen and entrepreneurs by tax gatherers … In Europe there were always some princes and local lords willing to tolerate merchants and their ways even when others plundered and expelled them” (Paul Kennedy 1987, pp. 19f.).

“The availability of alternative nation states for production meant that labour expelled from one nation could find other nations in which to locate, and the possibilities opened for capital mobility could operate as a deterrent to widespread political confiscations” (Stanley L. Engerman 1988, p. 14).

“Western technological creativity rested on two foundations: a materialistic pragmatism based on the belief that the manipulation of nature in the service of economic welfare was acceptable, indeed, commendable behavior, and the continuous competition between political units for political and economic hegemony” (Joel Mokyr 1990, p. 302).

“The various European societies complemented one another, and their internal competition gave (Europe) a dynamism that China lacked” (Mokyr 2003, p. 18).

“Ironically, then, Europe’s great good fortune lay in the fall of Rome and the weakness and division that ensued … The Roman dream of unity, authority, and order (the pax Romana) remained, indeed has persisted to the present. After all, one has usually seen fragmentation as a great misfortune, as a recipe for conflict … And yet, … fragmentation was the strongest brake on wilful, oppressive behaviour. Political rivalry and the right of exit made all the difference” ( David S. Landes 1998, pp. 37f.).

For those interested in the topic, Vaubel’s entire paper is worth reading. But if you don’t have time, just remember that national sovereignty should be celebrated. Not because national governments are good, but because competition between governments is the best protector of liberty and civilization.

P.S. Since this post is designed to show the intellectual case for jurisdictional rivalry, here are some quotes from a number of Nobel Prize-winning economists.

George Stigler:

Competition among communities offers not obstacles but opportunities to various communities to choose the type and scale of government functions they wish.

Gary Becker:

…competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.

James Buchanan:

…tax competition among separate units…is an objective to be sought in its own right.

Milton Friedman:

Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them.

Edward Prescott:

With apologies to Adam Smith, it’s fair to say that politicians of like mind seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise taxes. This is why international bureaucracies should not be allowed to create tax cartels, which benefit governments at the expense of the people.

Edmund Phelps:

[I]t’s kind of a shame that there seems to be developing a kind of tendency for Western Europe to envelope Eastern Europe and require of Eastern Europe that they adopt the same economic institutions and regulations and everything. …We want to have some role models… If all these countries to the East are brought in and homogenized with the Western European members then that opportunity will be lost.

Douglas North:

…international competition provided a powerful incentive for other countries to adapt their institutional structures to provide equal incentives for economic growth and the spread of the ‘industrial revolution.’

Friedrich Hayek:

…while it has always been characteristic of those favouring an increase in governmental powers to support maximum concentration of powers, those mainly concerned with individual liberty have generally advocated decentralisation.

Vernon Smith:

[Tax competition] is a very good thing. …Competition in all forms of government policy is important. That is really the great strength of globalization …tending to force change on the part of the countries that have higher tax and also regulatory and other policies than some of the more innovative countries. …The way to get revenue is doing all you can to encourage growth and wealth creation and then that gives you more income to tax at the lower rate down the road.

Last October, the Grim Reaper cut down my long-time colleague and friend, Bill Niskanen – Chairman Emeritus of the Cato Institute. If Niskanen’s loss wasn’t bad enough, I learned in April that I had lost another friend and brilliant economist, Ralph Turvey. On September 14th, we will celebrate Ralph’s life at the Reform Club, in London. For this event, I prepared the following, a “remembrance.”

I feel as though I cut my economic eye teeth on “Turvey.” Yes, I even wrote two articles with titles that contained the word “Turvey:”

But, my favorite remembrance of Ralph wasn’t from economics, per se. Once, after Ralph had abandoned his regular duties at LSE in the 1960s, I asked him why he still embraced the title, “Professor.” He immediately replied, and with twinkle in his eye: “Well Steve, in London, the title ‘Professor’ can still pull the first table in a proper restaurant.”

We both then had a very good laugh and resumed our intense discussion on the beauty of water meters.

The Cato Institute regrets to announce the passing of Ronald Hamowy, distinguished intellectual historian, Cato Fellow in Social Thought, and editor of The Encyclopedia of Libertarianism. Ronald died Saturday at the age of 75, after a long series of health problems. His friend Steve Cox, editor of Liberty magazine, has an informative and touching remembrance:

He was one of the libertarian movement’s most important and vital scholars. An historian of the 18th century, he was known for his impeccable standards of research and writing. To discerning researchers of the Enlightenment — left, right, or center — his word was law. If there was a scholarly myth or illusion, he was the one who was trusted to puncture it. He was the person who meticulously set things straight. Many times, when I have mentioned his name in an academic conversation, the reply has been, “Ronald Hamowy! You know him?!”

For libertarians, Ronald will always be recognized as a bright star of the post-World War II generation — but unlike many other grand old men of this or that era, he never became a Grand Old Man. He retained to the end his youthful joy and sense of first discovery. To him, any new fact — or any old movie, viewed on his constant friend, Turner Classics — was a pleasure to be greeted as if it were the first one in the universe. Even when ensconced as chairman of an august intellectual conference, Ronald let his eyes sparkle and his mouth crinkle with laughter, and with some little Count Basie-like verbal gesture he set the whole house laughing with his infectious wit.

Ronald managed to meet and study with many of the great liberal and libertarian thinkers of the 20th century. As Brian Doherty notes in Radicals for Capitalism, he went to grade school with economist George Reisman, who introduced him to high school friends Ralph Raico and Robert Hessen, both future historians. He attended Ludwig von Mises’s New York University colloquium in the 1950s and became a lifelong friend of Murray Rothbard. He went to the University of Chicago for graduate school and studied under F. A. Hayek and then did post-graduate work at Oxford under Isaiah Berlin.

At Chicago he co-edited the legendary New Individualist Review, one of the earliest libertarian journals. Ronald’s works include The Scottish Enlightenment and the Theory of Spontaneous Order (University of Southern Illinois Press, 1987), Canadian Medicine: A Study in Restricted Entry (Fraser Institute, 1984), Dealing with Drugs: Consequences of Government Control (edited, Lexington Books, 1987), The Political Sociology of Freedom:Adam Ferguson and F. A. Hayek (Edward Elgar, 2005), and Government and Public Health in America (Edward Elgar, 2007). His last project was editing the definitive edition of Hayek’s The Constitution of Liberty (University of Chicago Press, 2011). When that book was published, he presented it at a Cato Institute panel featuring Bruce Caldwell, Richard Epstein, and George Soros.

He also edited a scholarly edition of Cato’s Letters, for which the Cato Institute is named, for Liberty Fund. His magnificent achievement, The Encyclopedia of Libertarianism, belongs on the bookshelf of every libertarian and everyone with an interest in political philosophies.

Before Obama named [Leon] Panetta as CIA director, the former congressman from California had little experience on national security issues. This was part of a larger trend: many of the president’s important foreign policy aides have scant training in foreign policy.

For example, the president’s national security adviser, Tom Donilon, had been a Beltway lawyer, lobbyist and executive at Fannie Mae. The lead author of the president’s National Security Strategy, Ben Rhodes, has a background in fiction and poetry, putting aside work on his first novel (“The Oasis of Love”) to join the administration’s speech-writing team, from which he moved over to the National Security Council.

It’s come up again with the Romney campaign. Josh Rogin points to a memo taking aim at “The Foreign Policy & National Security Failures Of President Obama” that was authored by Romney’s main policy adviser, Lanhee Chen. By all accounts Chen is a brilliant guy, but there’s no evidence that he has any experience in foreign policy. His dissertation at Harvard discussed how judicial elections affect the law, and he did extensive work on domestic policy—health care, in particular—at the Heritage Foundation.

So why does he get tasked with writing the memos on foreign policy? Why, for that matter, did Rhodes get knighted a foreign-policy majordomo in the Obama campaign, and then later in the administration itself? Does this sort of thing happen in other policy areas? Do speechwriters parachute into important legal-related professions when their candidate wins? Do political scientists take major roles at Treasury? If not, why are those social-scientific professions treated differently than political science?

I understand the response that foreign policy is not construction and that security studies is not engineering. I also understand the argument that it’s more important to have someone who gets along with the president than it is to have an actual expert. But does everyone really believe that having actual foreign-policy experts taking foreign policy–related positions in politics would do nothing to improve our foreign policy?

This isn’t an ideological, much less partisan, lament. There’s no shortage of candidates on either side of the aisle. Peter Feaver is a hawkish Romney backer with tenure at Duke, and there are more than a few Dems with foreign policy expertise who could have taken the spots at the NSC. And the Lord knows you could find a widerange of views in the academy, if you wanted them.

So I can’t really figure it out: Why don’t presidents look for foreign policy experts in the academy?